IMF cuts forecast on second year of Europe contraction

The International Monetary Fund cut its global growth forecasts and now projects a second year of contraction in the euro region as progress in battling Europe’s debt crisis fails to produce an economic recovery.

The world economy will expand 3.5% this year, less than the 3.6% forecast in October, the Washington-based IMF said today in an update of its World Economic Outlook report. While the fund projects growth this year increasing from last year’s 3.2% pace, it expects the 17-country euro area to shrink 0.2% in 2013, instead of growing 0.2% as forecast in October.

“Is Europe on the mend? I think the answer is yes and no,” IMF Chief Economist Olivier Blanchard said in a video released with the report. “Something has to happen to start growth.”

For the global economy, “this is better, but it is not great,” Blanchard said at a press conference today. “In particular, the growth numbers are not enough to make a dent to the unemployment rate in advanced economies.”

The IMF foresees Spain leading the contraction in the euro area, while growth slows in Germany, the region’s largest economy.

World Index

The MSCI All-Country World Index fell 0.2% to 1,391.21 at 11:00 in New York. It’s climbed 15% in the last six months. The euro fell 0.3%, trading at $1.3289.

“It’s clear that financial markets are ahead of the real economy. The question is whether they are too much ahead or not,” Blanchard said. “What we know is that it always takes some time for financial markets’ optimism to feed to the real economy and at this stage there are still obstacles to it.”

While measures to stem the debt turmoil last year helped boost financial markets around the world and decrease sovereign bond yields from Spain to Greece, European officials now still face a recession and unemployment at a record 11.8% in the euro area. The IMF warned that the region still poses a “large” risk to the rest of the world if efforts under way to strengthen its economies and work on a banking union slip.